The major indices spent the first half of yesterday in the red, but buyers stepped in at mid-day and enabled the broad market to recoup some of the previous day’s losses. Just as the Nasdaq lost the highest percentage the previous day, it rebounded the most yesterday and closed 0.8% higher. The S&P 500 Index bounced only 0.3%, while the Dow Jones Industrial Average only closed flat. Unfortunately for the bulls, yesterday’s gains occurred on volume that was marginally lower than the previous day. In fact, it has been nearly a month since the Nasdaq closed higher AND on higher volume. Despite the slight gain in the S&P, breadth in the NYSE was negative, as declining volume outpaced advancing volume by a ratio of 1.2 to 1. Conversely, volume breadth in the Nasdaq was positive, with advancing volume outpacing declining volume by 1.5 to 1.
During yesterday morning’s weakness, the Nasdaq Composite was trading lower than its previous low from May. However, the afternoon rally enabled the index to close above its prior low, while also maintaining support of its 200-week moving average. The daily chart of the Nasdaq below illustrates the intraday probe below the prior low, but closing price above it:
The fact that the Nasdaq closed above its May low is very important because a closing price below it would have been quite bearish. If the May low is violated with conviction, there is no significant support in the immediate vicinity. You may recall that the prior low from May also converges with support of the Nasdaq’s 200-week moving average. Yesterday’s afternoon recovery enabled the Nasdaq to maintain support of the closely watched 200-week MA:
Going into today, watch the 1,865 level on the Nasdaq, which is the prior low from May. If the Nasdaq holds above that level AND volume is decent, you may want to begin “testing the water” on the long side with a position in QQQ (Nasdaq 100 Index), but only if the prior low remains intact. We certainly do not have enough confirmation to recommend large position size or an aggressive number of long positions, but a possible double bottom on the Nasdaq is reason enough to initiate new buys with small position position size. As always, obey your stops because the current environment has been showing us the market can reverse direction in the blink of an eye.
While the Nasdaq may be finding support of a possible double bottom, it appears that both the Dow Jones Industrial Average is beginning to exhibit relative weakness to the Nasdaq. This is not surprising because the Dow held relatively firm while the Nasdaq was getting whacked for the past month. So, we are now beginning to see slight sector rotation out of the S&P/Dow and into the Nasdaq. Remember that institutional money always has a home, so your job is simply to follow the direction of that money flow. Doing so will increase your odds of profitability and decrease your overall risk. It is our thoughts that the best risk/reward ratio on new short positions can be found in the “old economy” NYSE stocks as opposed to the Nasdaq. Many Nasdaq stocks have already gotten slammed hard, but the traditional blue chips are only now beginning to show weakness. Consider short positions in sectors such as Financial and Retail as opposed to Semiconductors. Having a mix of long and short positions is probably a good idea right now, but your long positions should be in sectors that have already sold off hard, while the short positions should be in sectors that are only beginning to do so.
Today’s watch list:
DIA – DIAMONDS (Dow Jones Industrial Average Tracking Stock)
Trigger = 8 cents below the opening 20-minute low
Target = 98.90 (support of the May low)
Stop = 101.25 (just above yesterday’s high)
Notes = We anticipate further weakness in the Dow, but will only short DIA if it breaks below its low of the first 20 minutes of trading. Otherwise, we will not enter the position.
Daily Reality Report:
Below is Morpheus Trading Group’s daily
performance report of closed trades and an update on all open positions from The
Wagner Daily (Intraday Real-Time Room trades are reported separately in The
Wagner Weekly). Net P/L figures are based on the quantity of shares represented
in the MTG Position Sizing Model.
We were flat yesterday.
Edited by Deron Wagner,
MTG Founder and